Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 95 votes
Hey Bp looking for some more of your great advice/help.
So today a long time friend and I verbally decided to get involved in a 50/50 partnership. He would provide 100% of the capital needed for our venture and I would take care of everything else. The business plan is to initially flip homes then once we grow, to rehab and hold. I came up this this proposal along with a written business plan that he has already gone over.
I already have a sole proprietor LLC set up and plan to set up one I believe as an "s" corp to include the partnership. I have been to Usleagal already and will have it set up through an accountant, but in the meantime I would like to get my friend/partner more info on our future LLC. I'm looking for any info on this topic. This entity is all new to me and appreciate any and all advice. Thanks!
Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
11y
Obviously to someone with access to other financing, 50/50 might not seem like a great deal. To someone without access to other financing, it is a dream. Rob insists that he won't give 50/50 to a money partner, yet I work with developers who pay me over 70% of profits for my financing. This allows them to leverage like crazy.
It isn't always feasible to just tell your partner you want him to be a lender. Maybe he doesn't want to lend to you at 8% plus points. So you make the deal you can.
To address your original concerns, I would put the property in both of your names or even just his. That gives him the security he needs. The JV aggreement needs to address responsibilities, etc. but most importantly you need to address the worst case scenarios.
What happens if things go south and you walk away from the project? (It happens. People get injured, die, etc)
What happens if he can't come up with the ongoing costs of a project?
Think up all the possible things that can go wrong, address those and you should be ok.
Investor · Mooreville, NC · Member since 2008 · 139 posts · 58 votes
11y
I am personally not a big fan of these 50/50 partnerships where one person lends the money and the other person does "everything else". When I have a money person involved, I set them up like a lender. They get somewhere around 8% interest and some points for lending me the money. They are the mortgage holder so they are protected by a 1st lien position in the property. You can do several of these deals like this in a year and your money guy will have a nice return for their investment.
Flipper/Rehabber · St. George, UT · Member since 2010 · 212 posts · 114 votes
11y
I love 50/50 partners... Until you loose the partners money. So be clear and have written agreements for the "what ifs".
I agree with Rob... The money guy needs to be secure as "the lender". They have the most at risk.
For the first 6-10 deals plan on getting your feet wet and make your money partner always come out whole. You will learn a lot and they will become a valuable asset.
Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 95 votes
11y
@Rob Caldwell thanks for the advice. I will only be doing this part time until I quit my full time job hopefully in 4 years, so I probably will only be able to do up to 4 deals a year. I understand that "everything else" is a time consuming task but isn't there something to be said for the convience of capital without having to go the rout of conventional financing? Is there another way you think I can structure this?
Thanks @Justin Morgan , I understand the risk in loosing the partners money but this is the ways he would like to be involved.
I know this isn't the ideal situation for an investor but I feel structuring it this way could excel the growth of the company.
Involved In Real Estate · Houston, TX · Member since 2014 · 39 posts · 9 votes
11y
As mentioned above, things always have potential to turn ugly with these type of set ups, but seems like you have things well thought out. Although he is taking on risk by lending, you are technically "doing everything else" which can add up to a WHOLE LOT OF SWEAT put in on your end. When its all said and done will he deserve half of all of your relentless hard work and effort just because he had some dough to front you at the beginning? I think not! I agree his percentage should be adjusted accordingly per deal etc. Geez..Half?! While you're doing all the necessary work? ..In that case you are a lenders dream come true!! Lol. Keep us updated, I hope whatever you decide works out for you.
@Rob Caldwell thanks for the advice. I will only be doing this part time until I quit my full time job hopefully in 4 years, so I probably will only be able to do up to 4 deals a year. I understand that "everything else" is a time consuming task but isn't there something to be said for the convience of capital without having to go the rout of conventional financing? Is there another way you think I can structure this?
I don't think Rob was suggesting conventional financing. He was suggesting that -- instead of making your partner an equity partner -- you have him lend you the money instead. You set fixed annualized terms (points/interest rate) and he gets a fixed return based on the time you have the loan. He doesn't share in the profits, but he also doesn't have a risk of losing money (you take that risk).
Yes. You should meet with a real estate attorney and have him or her create a loan agreement between you and your money guy. Most people don't realize this, but a closing attorney represents the lender at the time of the closing. So your attorney will represent your lender and protect them from loss. This is the safest and most business savvy method for the type of deal that you are suggesting.
I'd like to continue this thread a little here as I also have recently put together a 50/50 partnership and am trying to decide its value. Ours is structured as a JV between the 2 individuals, as a single owner LLC is not worth the paper it's written on in the State of Maryland. I research the properties, negotiate the deals. He pays cash for the house and any/all settlement expenses. I pay for (cash), coordinate, and manage all rehab and then also coordinate the agent listing for resale. All expenses are paid back, profit (or loss) split 50/50.
I must clarify that the area and properties we focus on are 200-300K, rehab may be 60-75K, ARV 400K+. The fact that we split the profit 50/50 means that I need to find deals with an total estimated 16-20% ROI to make it worth it. The problem this presents is finding those deals. They do exist but one must also compete with investors who do not need to split their profit and WILL outbid me. I couldn't do this at this level without a private equity investor but realistically I'm not sure it's practical. There's gotta be a better way.
Open to continued fellow BP investor opinions that might steer both of us in the right direction.
Real Estate Investor - Internet Marketing Professional · Denver, CO · Member since 2014 · 181 posts · 41 votes
11y
A lot of food for thought here. My wife and I were thinking of doing a 50/50 partnership with another married couple. We would do the work, they would finance everything. The only thing is all four of us are rather new to investing, and my wife and I have been rethinking about starting up this partnership. Instead we're thinking of maybe asking an experience rehabber to team up with us on a deal, and teach us the ropes. Otherwise it might very well be the blind leading the blind....lol.
Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 95 votes
11y
Thank you @J Scott your advice is much appreciated.
@Bryan Gamble and @Steve Bradigan for contributing to the conversation, I will be meeting with my accountant/ lawyer this week and let you know what we decide on.
That is exactly my point! I cannot emphasize this enough! DO NOT make your partner(s) an equity partner! DO NOT, DO NOT, DO NOT! Instead, set them up as the lender! This is the most legitimate approach as it protects them and you! I'm just going to say it... If anyone were to approach me wanting a 50% stake in one of my deals, I would either think of them as a fool, or a mafioso! This is why legitimate lenders that are regulated by the government have limits on how much interest they can charge a borrower. It protects the borrower from being taken advantage and prevents the people lending the money from screwing people!
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
11y
"The only type of ship that won't sail (or float) is a bad partnership." Or to that effect. If I were to do an equity split, I would do a separate JV agreement per deal, holding title as joint-tenants with %s listed. I agree with @Rob Caldwell . Keep it clean by taking them on as a debt lender. Sweeten their return if your return exceeds $x. Creating an ongoing partnership to 'flip houses' for however long involving however many deals from here on sounds romantic and all but is a recipe for disaster in my opinion!
Flipper/Rehabber · Toronto, ON · Member since 2011 · 122 posts · 26 votes
11y
I would have no problem paying my lender 50% for 100% of his money. But would not put him on my company. Just a JV his company and mine joining forces.
I always consider this a temporary arrangement, too build capital then go it alone
OK - I get the message. Thank you very much for your candor. I'm going to attempt to revisit this partnership and suggest a lender arrangement as advised. Unfortunately I may lose my backing when I do this. Might put me back to square one. I guess if that's going to happen, better now then after it's too late.
Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
11y
Obviously to someone with access to other financing, 50/50 might not seem like a great deal. To someone without access to other financing, it is a dream. Rob insists that he won't give 50/50 to a money partner, yet I work with developers who pay me over 70% of profits for my financing. This allows them to leverage like crazy.
It isn't always feasible to just tell your partner you want him to be a lender. Maybe he doesn't want to lend to you at 8% plus points. So you make the deal you can.
To address your original concerns, I would put the property in both of your names or even just his. That gives him the security he needs. The JV aggreement needs to address responsibilities, etc. but most importantly you need to address the worst case scenarios.
What happens if things go south and you walk away from the project? (It happens. People get injured, die, etc)
What happens if he can't come up with the ongoing costs of a project?
Think up all the possible things that can go wrong, address those and you should be ok.
Thank you for the view of the flip side of the coin. This is the position I find myself in. We've been business associates for 15 years, communication is not a problem. I don't believe he is interested in acting as a lender. He's done this before. And as @Mike Hepburn states, he is aware that my goal is to build capital of my own. We would surely continue to do some deals together. The existing JV agreement is 12 pages long, nothing shady, but as you mention it covers just about every scenario for both partners. I saw a quote here once "50% of something is better than 100% of nothing". I think for now I'm going with that philosophy albeit much more informed thanks to fellow BP members.
Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 95 votes
11y
@Mike Hepburn thanks for the suggestion, I'm just starting out(again) and believe that the leverage of using his cash will help the company grow much faster, plus removing any risk of my families finances.
@Eric M. great advice, yes I will make sure I have all the "what if's" addressed in the contract.
Greatly appreciative of all the helpful feedback BP,
Flipper/Rehabber · Easton, PA · Member since 2013 · 224 posts · 36 votes
11y
We have a 50/50 Jv agreement and so far ( past year) has been great. We wouldn't have been able to get started if it wasn't for our partner. Now if you can get someone to loan you the money for an annualized ( or whatever amount of time you decide on) percent that would be better but if JV is the only way to get going, I say go for it! All that to say, we now have other PML interested in funding our deals and are definitely going the loan route this time and doing deals with them outside of the current Llc we have with our partner. It kinda feels like cheating though....is it?.....if our current partner just fronts capital??
Flipper/Rehabber · St. George, UT · Member since 2010 · 212 posts · 114 votes
11y
@Jessica H. Yes I believe that your current LLC partner WOULD feel cheated. And that is why I believe @Rob Caldwell and a few others are suggesting to @John Geldert to NOT make a money partner 50/50 in the business.
For what it is worth I suggest that YOU own your business (not you and the money guy)... in the beginning the value is not "in" the business or the partnership the value is in the deal you can find. The deals are the only way the business makes money. Then money or partners will show up when they see you have value (deals).
You have heard the saying: "you make money when you buy". Well that is true and partners are easy to find when you have a great deal, trust that. Go find the deal!
Getting "out" of a partnership like Jessica is hinting at WILL become a reality when you need to and want to keep more of the profits. Otherwise you might burn the bridge of a great money partner.
Find a partner that is willing to loan based on a 50/50 arrangement... PROPERTY SPECIFIC... but focus FIRST on finding the deal.
This has worked VERY well for me... I have done a ton of 50/50 deals when I needed the money partner and lacked the funds. But the same money partner was/is very willing and very happy for me when I take down deals on my own and use him for hard money.
I can not fund all the deals I find and it is very nice to take one or two on my own then go to the money guy and say "how about 50/50 on this ONE" because I can't do it on my own.
That is WIN-WIN and your protecting everyone and maximizing YOUR profits.
Flipper/Rehabber · Easton, PA · Member since 2013 · 224 posts · 36 votes
11y
I understand what you are saying, there is a lot of debate about 50/50 JV but honestly I think it is really what allowed US ( and our specific situation) to get into the game. It could be different for others though......We will still keep our 50/50 LLC with our business partner and continue doing deals with his capital but also open up another LLC to do our own personal deals with other PMLs.
Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 95 votes
11y
Thanks for the great advice @Justin Morgan , I'm in the same boat as @Jessica H. . So my PML and I have decided to make it a JV on a deal to deal basis. From what I have been reading the property should be put in his name, and im 100% fine with that. Now the question is, the property will have to or should go under an LLc in case we are unable to sell initially, we will end up renting it. As I mentioned earlier, I currently have my own LLc with a rental property under it. So now do we open another LLc under both our names or just his?
Investor · Portland, OR · Member since 2014 · 354 posts · 149 votes
11y
Long time friend and partner with all the money is a scary mix. If I were to loan my best friend $100,000, and I saw him "investing" his time in anything else, be it work, leisure, even family, it would be hard to not allow resentment to creep in if the deal does not come out perfect. If it is perfect then no worries, but the one time it fails and you didn't do EVERYTHING, its going to hurt the friendship.
(I am in a partnership with my friend right now, but we are both equal in work and investments and we still talk about the issues that come with being friend partners. being open and honest and always talking about the little issues is important.)
Investor · Philadelphia, PA · Member since 2013 · 185 posts · 97 votes
11y
I'm currently in a similar situation with a colleague from my day job wanting to partner with me on a few deals - he previously financed my first rental property, but now wants to get "more of the pie". I like the concept that X% of a $X is better than 0% of a million dollars, but I also would like to make sure the deal makes sense for both of us - managing risk and reward.
Seeing as this is an old post, I'm just curious where you landed with this and if you have an recommendations based on your experience - for me, this is 50/50 or X%/X% for a rental and not a flip.
Attorney · Fort Worth, TX · Member since 2015 · 372 posts · 176 votes
11y
You should consult with a lawyer in your jurisdction. (And only you should go, don't tell your partner or take your partner with you for conflict of interest reasons. You want your lawyer to represent ONLY you, not your partner, not the partnership, LLC, etc..)
There are so many ways to reward capital and sweat different and there may be advantageous ways to do it in your jurisdiction.
Contractor · new paltz, NY · Member since 2013 · 104 posts · 13 votes
10y
50/50, is the way a lot of people get started. It's not perfect but it gets the ball rolling, despite what all these people are saying. It's very common. When you have several under your belt, and cash in your bank account you have a few more options. I charge 50% of my usual carpentry hourly, and deduct that from sale price as well.
Jacksonville Beach, FL · Member since 2015 · 115 posts · 19 votes
10y
I'm about to enter a 50/50 partnership. My partner is actually my father who understands very well what I am getting into and the risks involved. He will be supplying all of the funds, I will be handling all of the work. I'm almost at 10 months of planning and structuring.
Initially I had a bank interested in working with me; however, when my father expressed interest, a few weeks ago, I began exploring getting a loan from him instead. I have no decided that the most profitable way for both of us is a 50/50 partnership.
When it is a close trusted relationship like this, do you all agree that 50/50 partnership is the way to go?